The High and Lows of the Street.com
Sooner or later, it seems, every financial journalist in America interviews James Cramer. By the end of the 1990s, his profile was so high as a writer, television commentator, hedge fund manager, entrepreneur and all-around evangelist for the trading life that he came to embody the zeitgeist. He was the gunslinging, rapid-fire, moneymaking stock jock whom everyone sought to emulate. And he did not shrink from this role. By the time I finally met him this September, however, he seemed subdued, maybe even a little defensive. "I'm 45," he announced, about two minutes into our conversation at the offices of Cramer Berkowitz & Co., his hedge fund. "I'd like to slow down. This is what's keeping me from slowing down."
"This" is TheStreet.com, the financial news web site that is virtually synonymous with Cramer's grinning and goateed visage. Whether someone so voraciously ambitious would ever really want to slow down is an open question. And there is, of course, much more to TheStreet.com than Jim Cramer, who does not run it or even spend much time at its headquarters at 14 Wall Street. But it makes sense that TheStreet would obsess him. It was Cramer the entrepreneur who dreamed up the site, and Cramer the columnist who remains, for better or worse, its marquee attraction.
The problem hasn't been TheStreet.com, the site; it's been TSCM, the stock. On its first day of trading in May 1999, it closed at nearly $60, giving the company a market capitalization of more than $1 billion. Since then, TheStreet has become a small family of sites, with more than 100 journalists and commentators who cover the market's fluctuations in a tone that aims for insider sophistication cut with savvy attitude. "Ignore us at your risk" is its latest cocky tag line. Yet in mid-October, TSCM traded as low as $2.63 a share, making its market cap about $70 million - less than the cash the company said it had on hand. In other words, investors squinted at TheStreet and decided that the only worthwhile thing they saw was the company's actual unspent dollars in the bank. All the rest - the people, the brand, the concept, even the computers and desks - was worth next to nil. More than a billion dollars of value had melted away.
It's frustrating, and at times Cramer lets his frustration show, but he sounded even-keeled back in September. "I'm regarded as the father of the defeat of the stock price," he said then, "and I would like to be regarded as the father of the victory of the concept. There's a big gulf between those two."
Clearly something singular has occurred in the American capital markets in the past 18 months, and the travails of TSCM are just one plotline in that drama. E-tailers like eToys and Pets.com soared and collapsed. So did specialty content sites like iVillage and CBS Marketwatch. TheStreet.com's own Internet index - which includes companies from DoubleClick to America Online - has tumbled from a high of 1320 in March of this year to 545 at the end of October.
But TheStreet.com is the dotcom I've followed most closely, since before the site was launched. In part this is because I was a professional rival, engaging in Web-vs.-print arguments as we competed for stories, for readers and for editorial employees. At times I was a skeptic, and at times I was jealous. Even so, I followed the site as an ally, hoping that things would work out for several former colleagues who had landed there, and happy to offer advice or even send talent their way. I was also, briefly, a shareholder - but I'll get to that later.
The remarkable rise and fall of these stocks has burned its way to the front and center of the American consciousness, and it's hard not to wonder how to explain it all. Aren't markets supposed to be efficient? Was the market unfairly generous to these stocks last year or is it unfairly skeptical of them now? Or both? Perhaps the wild ride of a company devoted to covering the wild ride would be particularly revealing.
So I turned to TheStreet.com again, hoping to figure out through the story of one fledgling company how the sentiment surrounding it and so many others could have changed so drastically, so decisively, so fast.
* * *
TheStreet.com, backed by Cramer and by Martin Peretz, owner of The New Republic, was launched in November 1996. The business model called for attracting paid subscribers (both professionals and active individual investors) as well as selling ads. The centerpiece from the beginning was Cramer's column, "Wrong!," giving his view from "the trenches" of his hedge fund; a handful of journalists produced an ever-growing number of market stories.
I knew some of them. There was Jamie Heller, now 33 and the TheStreet's editor-at-large. She was the first person I knew who went to an Internet start-up. And there was Dave Kansas, also 33, who left The Wall Street Journal to serve as editor-in-chief; we had a number of friends in common and later became friends ourselves. Jamie and Dave are smart people, but back then I didn't take TheStreet.com or the idea that these pioneers would have some equity in it - or even Web journalism in general - very seriously.
Six months came and went, a year came and went, and TheStreet.com's profile rose. In an e-mail to me before we met, Cramer observed that if his goal had been simply to turn a profit, he could have started a website called jjcramer.com, hired a tiny staff and cleared a couple of million a year. It would have been, in other words, a variation on the newsletter business. I'm sure he's right. But the dream was bigger than that: to leap into the rift created by a new form of communication and start a media company from scratch, one that could run circles around what Cramer's columns called "the dead-tree press." That kind of ambition brings with it a whole different set of opportunities-and pressures.
In 1998 the site made its highest-profile hire: San Francisco Chronicle columnist Herb Greenberg. By May of that year, the New York City venture-capital firm Flatiron Partners led a round of financing that totaled $10 million for a one-third interest in the company, giving it a valuation of $30 million - an astonishing number considering that the site had only about 30 editorial employees. And yet, just seven months later, when TheStreet.com completed a second round of financing, its valuation had more than tripled, to $100 million. The stakes were rising.
The time in between had been a frenzy of growth. Flatiron helped assemble a management team that included CEO Kevin English, from Lexis-Nexis, and pushed everyone to think big, expanding the editorial staff and ad sales force. "Scalability" was the critical idea animating Internet companies, from Netscape to Amazon to Yahoo to eBay: This was the great land-grab moment, a window of real change in the economy that would create absolute winners and losers.
Editorially, TheStreet.com's coverage of this phenomenon remained levelheaded, even skeptical. "This is beyond mania," was the lead to a story about the moonshot initial public offering of TheGlobe.com. But as a business, TheStreet was moving at breakneck speed.
"Everything in the air said, 'Grow as fast as you can,'" Kansas recalled recently, speaking in his usual dry and measured tones. "I was thinking about how we could create international operations, how do we staff as rapidly as possible, how do we attract as many people as possible. There was a real sense of, 'You can think of anything you want to right now.' It was only as fast as you could put it together that would hold you back."
Kansas says his earliest guess was that TheStreet would last about six months, so he'd been more concerned with his cash salary than his shares in the company. But by December 1998, when he went home to Minnesota for the Christmas holidays, he'd had an epiphany. "So," his father said as they were driving around St. Paul together one evening, "what are you going to do in the next couple of years? What are your plans? What are your goals?"
Kansas looked at him and said, "I'm not really thinking about that, two or three years ahead."
"What do you mean?"
"Look," Kansas said, "if we do everything exactly right, the world is in such a place right now that we could knock the ball out of the park, and I wouldn't have to worry about two or three years from now."
His father was silent for a long moment. "Well," he finally responded, "don't fuck that up, then."
* * *
In April of 1999 TheStreet.com's road show blasted off, and in 13 days touched 29 cities in the United States and Europe, involving scores of repetitions of a concise PowerPoint presentation. Internet usage was booming. The stock market was booming. Main Street was taking charge of its financial future, trading stocks on line, en masse. A rival, CBS Marketwatch.com, had recently gone pubic at $17 and immediately traded over $100. The fact that TheStreet had 1998 revenues in the seven figures and not even a timetable for profitability was irrelevant, since that was the case with practically every dotcom. The firm had the imprimatur of Goldman Sachs as its lead underwriter, and its backers included The New York Times and Flatiron, which was by then the hottest venture capital firm in Silicon Alley.
The idea of a road show is to convince institutional investors to buy into a newly offered stock. Institutional investors, the thinking goes, are more likely to be loyal holders, not fickle ones who will flip that stock for a quick score. TheStreet was something like 30 times oversubscribed, and the offering price leapt from $11 to $19 a share. But demand on the morning of May 11 was keener still. As buy orders flooded in, the imbalance between potential buyers and sellers was so severe that it took a few hours to sort it out. When a market price was finally found — $59 a share — the NASDAQ ticker at the Goldman Sachs trading floor, where some Street.com insiders had gathered, lit up with TSCM transactions. By the end of trading-after an intraday high of $71.25, the stock closed at about $60-some 13.5 million shares had been bought and sold, although there were only 5.5 million outstanding. So much for loyal institutions.
Within the company, there had been what Kansas recalls as a "war" over options, as the we're-all-in-it-together start-up mentality bumped against the raw realities of dividing spoils. "There were shouting matches," he says. "I offered at one point to buy out a bunch of reporters, they were so bitter." But every employee had been granted options at a strike price well below $19, and many had bought additional shares at the offering price. So late on the afternoon of the IPO, Kansas had champagne delivered to TheStreet's offices and climbed onto a desk in the newsroom to make a toast to his staff; he also reminded them that they were in the business of covering the fire, not watching it.
The company was, for the moment, worth nearly $1.5 billion. Everyone knew that this was unrealistic, of course, and that the stock would "settle down"-but not too much. In June, with TSCM hovering at around $30, Hambrecht & Quist (which was a Street.com underwriter) and SG Cowen (which was not) initiated coverage, slapping $45 price targets on the stock. The Cowen report described TheStreet as "one of our favorite small-cap names in the Internet universe."
Insiders' shares were locked up-they couldn't be sold for 180 days or more-but the top staffers were, in the vernacular of the moment, instant paper millionaires. They had guessed right: The Internet was the future, and that unstoppable future had arrived. The ball had been knocked well out of the park.
* * *
So what went wrong? There are a few answers to that, and I'll start with the most contrary one: nothing. In four years, the site has gone from zero to 100,000 paid subscribers and built a national brand name; page views for the most recent quarter were up 150% over the same quarter last year; recently Money Magazine singled out TheStreet as one of the best sources for financial news on the Web. And it's hard to deny that this new medium is here to stay.
Obviously, however, that's not the whole story. TSCM hasn't traded above its offering price since January and has been in the single digits since March. Some disillusioned rank-and-file options holders have picked up the nickname for the stock used by its detractors on online message boards: T-SCAM.
The reasons for this collapse fall into two broad categories. First, as we all now know, the euphoria around the so-called Internet sector gradually evaporated. Press reports on the spending habits of some Internet companies introduced the phrase "burn rate" into the popular vocabulary. The proposed AOL-Time Warner merger suggested that it was time to convert funny-money stock prices into real assets. The rosiest visions of what the new technology could accomplish have not come true, and some dotcoms began to run out of money. Investors lost enthusiasm-they wanted to see profits, and they wanted to see them now. So TheStreet.com was in the wrong place at the wrong time, just as it had been in the right place at the right time a year earlier.
Then there are TheStreet's particular problems. A television deal with Fox ended in a messy divorce and a lawsuit (since settled). Because reporters know that at times there seems to be no fight that Cramer won't escalate, his missteps and feuds (with Peretz, with Fox, with TheStreet's management) always get prominent media play. More significantly, the company's senior management group, with the exception of Kansas, has turned over in the past 12 months. This includes CEO Kevin English (whose departure in late 1999 included a nondisparagement agreement). Along the way, the original business model was largely scrapped.
The new CEO is Thomas Clarke, a former executive at Thomson Financial who comes across as a streetwise, no-nonsense figure. "This is a turnaround," Clarke said when we met at TheStreet's offices. "We're in a new world. We've got new management. We've changed the business model." He describes his mission as finding a way to "legitimize the business" and make TheStreet profitable.
Cramer praises Clarke effusively: "If I thought I could do that job better, I would quit and go there. If Tom can't do it, it can't be done. But I'm not nervous at all. Before Tom came, I was incredibly nervous about everything. I just didn't have confidence." On the one hand, this sounds reasonable - but on the other, it's perpelexing. What does it mean for a company this young to be in "turnaround" - or that it found its way to the public markets before its business was "legitimized," and at a time when its biggest shareholder "didn't have confidence?" (Former CEO English declined to comment for this story.)
Clarke spent his first six weeks studying the business model and concluded that its reliance on subscription fees as the primary source of revenue was too limiting. He began retooling it. New "satellite" sites - IPOpros.com and RealMoney.com, which offers the columns of Cramer, Greenberg and other star commentators - target niche audiences and still charge subscription fees. But the main site, TheStreet.com, has been free since June, in the hope of attracting a more mass audience and ramping advertising into the company's primary source of revenues. Clarke has also reined in spending and put in place tighter budget controls, and he contends that TheStreet's U.S. operation will be profitable in the second half of 2001.
The move to a more ad-driven revenue model, however, has coincided with a wave of skepticism about the viability of advertising on the Web, as well as a cooling of Main Street's fascination with what is lately a far less sexy stock market. In the middle of October, Clarke told analysts that TheStreet would not hit its third-quarter revenue numbers, and the stock was pummeled to its all-time low. I am told that traffic looks better in the fourth quarter, but it would now take a great deal of very good news to pull TSCM out of the doldrums.
Clarke complains that his company is now "lumped in with the dotcoms because our name happens to have that. The fact is, we're essentially a traditional media company," he continues, with plans to leverage its brand name through conferences and a book.
This has become the popular spin among companies that aim to make money by selling ads against content on the Web. They invariably note that dead-tree start-ups like USA Today or Sports Illustrated took years to earn a profit. Of course, those were not stand-alone publicly traded companies. No individual investors were encouraged to buy stock-and no insiders became millionaires on paper before there were any profits. And that changes the rules.
* * *
At the same time that Clarke became CEO of TheStreet.com, Fred Wilson of Flatiron Partners took over the role of chairman of the board. "This company," Wilson concedes now, "wasn't ready to be a public company. We really hadn't figured out our strategy yet. It was a tiny business. Even today" - with projected 2000 revenues of about $30.3 million - "that's not a very big business. In the conventional world, maybe at the end of this year, going into next year, as we reach profitability in the U.S., that would be the time that you consider going public."
Wilson, 39, has been in the venture-capital business for 15 years. His partners are Bob Greene, who also comes from a traditional VC background, and Jerry Colonna, whose background is in publishing. "Jerry," Wilson notes, "was always the one who said, 'This is gonna be the next big thing. Valuations don't matter as much. This is momentum investing- someone's gonna pay more for this than we're paying for it.' Bob and I tended to be much more valuation-sensitive and say, 'Look, a company with 30 employees is never worth more than $10 million. Can't be.'
"You know," he adds, "old-fashioned rules."
At first I thought Wilson was slagging his partner, but I was missing the point. He was saying he's glad Colonna was there to prod him to change his thinking about Internet valuations because it led the firm to make some investments that have worked out quite well. Flatiron's investment of about $4 million in GeoCities, for example, was worth perhaps 100 times that amount when GeoCities was bought by Yahoo.
In any case, the rules are back - as Wilson now says he always knew they would be. "Ever since we started Flatiron I said, 'Let's value these Internet companies like their offline brethren.' So let's value TheStreet.com like The Wall Street Journal or Money Magazine," he says. "When it's a $60 million business with $10 million of EBITDA [earnings before interest, taxes, depreciation and amortization], what is that property really going to be valued at?"
You could argue that this is a rather late date to be asking that question, but let's consider it. If TheStreet were to reach the numbers that Wilson offers, and you used a generous price-to-sales multiple of 5 and a price-to-earnings ratio of 30, TheStreet would be worth $300 million. That's $11 a share, which would mean a more than 250% return on Flatiron's investment - but would still be significantly less than the IPO price of $19. Using the same multiples, the stock at $19 represented the promise of $100 million in sales and $16 million in earnings - incredibly optimistic for a company with a few million dollars in revenue.
But let's face it. No one who bought the stock last May was spending much time on the math. Investors instead were buying -
Well, what were they buying? Not its business model or its management team. Both have largely been replaced. While that's unusual for a public company, it's not unusual for a small start-up. And that's the key. People investing at $19 a share were - whether they understood it or not - in effect playing venture capitalist. Or more precisely, they were taking on venture-capital-size risks but paying public market prices to do so.
* * *
And then there's me. When TheStreet.com went public, I was baffled at the riches being created, envious of those benefiting and self-righteously outraged at the unfairness of it all. On the other hand I was - cynically and hypocritically - pleased. This is because I owned 500 "friends and family" shares, bought at $19 per. This opportunity came my way as a result of various advice, counsel, aid and cheerleading I had offered to my friends at TheStreet.com. Somehow my outrage did not get in the way of accepting.
Friends and family shares do necessitate the writing of a check, and I put at risk a greater percentage of my personal net worth than, say, Money Magazine would deem advisable. Why did I do it? I wasn't making a bet on the business. I was betting on supply and demand: I figured that the appetite for Internet shares was far greater than the number of shares available-and that this would be the case for some time to come. I almost certainly would have played the friends-and-family game even if my shares had been locked up for six months. But they weren't. And within a few days, TSCM was trading in the $40s, so I dumped all 500 shares at about $46.
"You made a hell of a lot more than I did," one ex-Streeter complained to me in a recent e-mail. This person told me of colleagues who, in the war for shares, had bought $19-a-share allotments with borrowed money and are now badly in the red, and went on to express no small amount of disgust that, having profited from TSCM's rise myself, I now intended to resurface and tut-tut at the company.
That's not my motivation. Actually, I want friends like Heller and Kansas to succeed. I think Cramer and Greenberg are talented commentators. I like the site, and these days I certainly take Web journalism seriously. I'm surprised that, at the very least, a buyer has not emerged.
Still, I can understand the temptation to blame someone for a slaughtered share price - the owners of TheStreet.com, the venture capitalists, the investment bankers, the institutions, the day-traders. But the truth is that everyone was playing his or her role. The investment bankers sold the stock to institutions because that's what investment banks do. Institutions flipped the stock to day-traders because their function is to rack up high returns. TheStreet.com and its backers went after the money because the opportunity was there and it would have been absurd to deny it.
It's probably true that many dotcoms - including TheStreet - should not have gone public so young. But as more than one person asked me, what should TheStreet have done? Refused to go to the capital markets? Turned down the chance to raise a war chest of $100 million? Ignored the fact that competitor CBS Marketwatch (whose valuation is now even lower than TheStreet's) could use its own stock to make acquisitions?
Today, at $3 or $4 a share, an investment in TSCM represents something quite different than it did in May 1999. There is still risk, as there would be with any small company that hasn't yet proved that it can make money. But there certainly isn't much optimism left in its share price. What has happened to TSCM and all of the other Internet stocks is that gradually, by a thousand cuts, they have stopped being Internet stocks. By that I mean that they stopped being a novelty and started being companies, subject to the same laws and rules as other companies.
And so it is that the dialogue around TheStreet.com, which in a less hyperbolic era would be taking place quietly, between its backers and its management, has instead happened very much in public. By now this state of affairs even seems to have gotten under the skin of Jim Cramer, a man who has seemed determined to live his professional life as publicly as possible, often analyzing the ups and downs of TheStreet.com in his column (which of course is partly premised on being about the ups and downs of his hedge fund). After he gave media reporter Howard Kurtz excruciating access during the reporting of Kurtz's The Fortune Tellers, Cramer promptly criticized the book in print. But he doesn't hate Kurtz, he later clarified in another piece: "I like him very much. I hate myself!" He has even popped up on Yahoo's chat board to defend himself from the surreal personal atttacks there.
Although Cramer has been a consistent buyer of TSCM shares at depressed prices, his defensiveness and frustration seemed to get the better of him after the recent revenue warning. "If I had been able to pick the right people from the beginning," he told Fortune, "this enterprise could have been hugely successful as opposed to just kind of successful."
As October wound down, I spoke to Wilson again, just after a board meeting. "We're making tough decisions," he said, and although he would offer no details, he did suggest that "just going free wasn't enough." As for Cramer, it would appear that his fellow board members might have laid down some ground rules for his dealings with the media. "I was being flip and being immature, and I apologize," he said in reference to his comments to , and virtually every question I asked after that was answered with another variation on "I apologize to our great team."
In any case, the dreams of dominance so common to Web start-ups just 18 months ago have faded. Not just at TheStreet but at a whole range of companies, the notion that the market might be unfair has migrated from those outside the Internet revolution to those in its front ranks. "I think it will be revealed that we are viable," Cramer said in September. "It's funny to say that there's a publicly traded company that's been out for a year that's not viable, and I think we're tremendously viable. But obviously the market makes a judgment: 'You may think you're viable, but we know otherwise.' What I'm saying is that my confidence is that we will execute correctly and be revealed as a valuable situation. But as I've said repeatedly, if we don't execute, then we're gone."
What happens next, then, is up to the people who run TheStreet.com. The business will succeed or it won't. Which is exactly how it should be. The market really is efficient-eventually.
But is it fair? No, of course not. And if the rise and fall of Internet stocks haven't taught us that, nothing ever will.
A similar version of this story appeared in the December 2000 issue of Money.
